Cryptocurrency Derivatives Guide

The introduction of cryptocurrency brought a massive change to the financial industry. It uses blockchain technology for making life easier. Irrespective of the success that this industry has recorded so far, there is a requirement for more sensitization to introduce greater adoption, as well as for a way to advertise cryptocurrency more through its derivatives.

What Is a Derivative?

Derivatives are financial products that can either act as a security or a contract that depends on another asset for having a value of its own. This means that without a steady movement of cash flow or some other asset, the derivatives are useless. 

The common underlying assets where the derivatives secure recognition are bonds, currencies, and commodities. However, their value isn’t only tied to these above-mentioned elements. This is because it can secure value from almost all types of assets that exist.

Types of derivative products in the financial world

Derivatives are widely-popular trading instruments simply because they can enable the holder to speculate on the rising/falling asset prices, without holding the underlying instruments. Due to margin conditions and tight trading costs, retail traders and institutions continue to use them as opposed to buying hard assets. 

Various Forms of Derivatives

There are 4 different forms of derivatives. Let’s take a quick look at them. 

• Options

It is a contract that enables a seller or a buyer to make a transaction with a certain asset at a pre-decided price, as they work with a certain timeline. Same as with CFDs, the trader isn’t obliged to purchase the asset as per the contract. This is a clear distinction between futures and options. 

• Forwards

This is a contract that is customized for catering to the requirements of a trader. It is generally conducted in over-the-counter exchanges. You must take risk factors into considerations. Like CFDs, these instruments can also be traded on margin.

• Swaps

This occurs between two parties that come together just to make a profit by planning out exchange cash flows at a particular time in future. The assets that are exchanged are notes, loans, bonds, or other financial assets that are also used for CFDs. 

• Futures

It is a contract that obligates a trader to buy, or sell, an asset at a predefined future price and date. 

• CFDs

Contracts for Difference (CFDs) are derivates tracking the price performance of the underlying instruments. Brokerages offer CFDs based on FX, stocks, indices, commodities, cryptocurrencies, or other popular asset classes.

Using Derivative in Crypto Trading

With the popularity of cryptocurrency continuing to spread like wildfire, traders keep finding price changes profitable, while trying to make the most of them.

The introduction of Bitcoin CFDs with easyMarkets has provided traders with a new tool that they can use for mitigating risk, just by signing a contract. Traders see this as an opportunity to derive profit just by identifying a cryptocurrency with a low price and purchasing using CFDs, only to sell as the price increases. However, you should know that this strategy is quite risky. In case you plan to use it, it should come into play in a bullish market trend.

Traders can also generate returns by shorting. It proves useful when the market is in a downward trend. Traders borrow crypto from a third party such as a broker or an exchange and then sell it when they think that the cost is going to drop. After the price falls, traders purchase the same amount of assets but at a lower price.

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